Manufacturing success in Nokia’s India SEZ

While the government dithers about how to solve a crisis that has developed over India’s controversial Special Economic Zones (SEZs), a few companies are showing how small zones can spread development and attract foreign direct investment (FDI), without falling into the clutches of politicians, bureaucrats, and protestors (see Blog – Special Economic Zones Are About People, Not Just Development).

In southern India, Nokia, the Finnish mobile handset company, is leading the development of an electronics hardware zone where, along with eight of its suppliers, it will mop up more than $200m investment and employ some 20,000 people within two years. Located an hour’s drive outside the Tamil Nadu state capital of Chennai on the highway to Bangalore, one factory is already being run by Nokia, and Foxconn of Taiwan, one of its suppliers, has another one nearby. Both have shown in less than a year that India is capable of manufacturing precision goods economically and to international standards.

the Nokia factory

Nokia chose the 200-acre SEZ site in 2005 in preference to others elsewhere in India, and some abroad, because the state of Tamil Nadu offered it an SEZ location that would free it from some government hassle. The site is near the coast with seaport and airport connections, though these often cause more hassle than they solve for importing components by sea and air – especially Chennai airport, which cannot cope efficiently with its passengers, let along cargo. Such infrastructure problems, plus high power costs, make it difficult for India to compete with China, though the problems are offset by exemption from import duties and some corporate tax holidays.

A key advantage is that there will be a cluster of companies in what is known as the Nokia Telecom SEZ, with suppliers such as Foxconn located next to Nokia, supplying the domestic market as well as exporting.

As the developer, Nokia has a 99-year lease from SIPCOT, Tamil Nadu’s industrial investment agency that acquired the land some years ago, thus avoiding the sort of clashes with farmers that are now happening elsewhere when agricultural land is needed for industry. In addition to Foxconn, which makes printed circuit boards and other components, the companies include Salcomp, Aspocomp and Perlos from Finland, and Jabil Circuit, Laird Technologies, Wintek from the U.S.

A report published today by ICRIER, a Delhi-based economics think-tank which is working on SEZ policies for the government, says that companies like Nokia and Foxconn had previously been “reluctant to come to India” because they “work on thin margins and manage operations on scale and efficiency” – so SEZs did generate investment and provide jobs that would not have otherwise happened.

While its factory is being built, Foxconn started production a year ago in a nearbyformer Panasonic building making components and mobile phones, mostly for Nokia, plus networks. This is in a sort of semi-SEZ, called an export-oriented unit, where 50% of output has to be sent abroad (or into an SEZ).

Proud of its virtual anonymity as a supplier to internationally known brands, Foxconn has found the transition from Taiwan to India far less difficult that one might expect for a company from that super-efficient high-tech country. It has found that its Taiwanese-style uniformed employees perform both manual and highly automated tasks well once they have been trained, consistently maintaining international standards that were rare in India’s manufacturing industry a few years ago.

Next year Foxconn will move into the Nokia SEZ and will also have another factory in a separate zone a few kilometers away where it is a co-developer with SIPCOT and Motorola. Singapore-based Flextronics also has a similar operation nearby, already in operation. These are graphic examples of how India can sometimes make manufacturing work well, especially when there is an enthusiastic state government involved.

The only blot on the landscape is that the Finance Ministry would like to impose a precise export requirement, as a percentage of production, in addition to a current requirement that SEZ companies should become net foreign exchange earners by 2009, exporting more than they import. Goods passed within the SEZ, or from an outside export oriented unit into an SEZ, count as exports for this foreign exchange calculation, but in a highly bureaucratic tweak of policy, they do earn tax exemptions applicable to exports.

The Ministry suspects (rightly) that there will be little exporting from many of the mammoth zones elsewhere that are attracting land-grab developers, so a primary aim of an SEZ will not be met. SIPCOT companies argue that any new export requirements should not affect their year-old agreements with the Tamil Nadu government. They have told the government that their ability to compete with operations in China could be jeopardised.

Meanwhile farmers’ protests are continuing against large SEZs, especially in West Bengal where there were clashes between police and protestors last Sunday at an SEZ site called Nandigram. The government has not yet come up with any major policy initiative, which means that the other main advantage of SEZs – the development of private-sector funded large-scale infrastructure – has yet to materialize.

Responses

Its silly to setup mini SEZs like Nokia has done. India has to look at China’s 5 SEZ: they are cities in their own right. Each has its own world-class Port, Airport, Power Supply, Water Supply and Gas Supply. Not to mention, world-class roads.

Most of China’s exports come from SEZs. Obviously in China’s SEZs there are no infrastructure problems, and they are all next to the coast, so the factories in SEZs dont need to send their goods across 100’s of kilometres to a port to export. Each SEZ has its own Port and Airport!

China’s SEZ were just big chunks of farmland (200-400sq km in size) 30 years ago. And 5 such chunks along the coast were selected and world-class infrastructure was built there to make SEZs for exporting goods.

There is no tweak in policy- Income Tax benefits are available only to the extent and proportion of exports to total turnover. So if companies sell more in the domestic market, they do not get IT exemption to that extent! In fact the Net Foreign Exchange earning would have been negative for Nokia SEZ if Information Technology items were not counted towards NFE even when sold in India – The tweak is here!